The economy rebounds as consumers save more, spend less

Jan. 1, 2020
CHICAGO ? There is a paradox in today?s recovering economy, and it is affecting your business whether you realize it or not. In fact, you might notice it more in your household. William Strauss, senior economist and economic advisor, Federal Reserve

CHICAGO — There is a paradox in today’s recovering economy, and it is affecting your business whether you realize it or not. In fact, you might notice it more in your household.

William Strauss, senior economist and economic advisor, Federal Reserve Bank of Chicago, describes the dichotomy of today’s consumers saving vs. spending the Paradox of Thrift, and it’s affecting today’s economy. He explained the pattern at the 2011 Global Automotive Aftermarket Symposium (GAAS) on Wednesday morning.

Consumer savings have increased quite markedly in recent years, Strauss says. However, while more money being saved can lead to better interest rates, which does take time, that means consumers are spending less. And because consumers represent two-thirds of gross domestic product (GDP), that’s a bad thing for the economy.

Taking a look at what these consumers are spending their money on, it sheds a light on the argument against high gas prices — and thus money for other services and products. Strauss told GAAS attendees that about 6.3 cents per every dollar spent is spent on energy goods and services. That includes gasoline and home energy costs. This is equivalent the long-term average during the last 50 years.

“While we might complain about it, I don’t think this is going to be a challenge of a risk of recession, certainly not at the levels we’re talking about,” he says. He later added, “Oftentimes the cure for high gasoline prices is high gasoline prices. There’s a demand side to this and the demand curve does slope down.”

In fact, he says the demand is changing: 2010 gasoline prices were 21.6 percent higher and gasoline sales were 10.3 percent lower than in 2009.

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But if customers are saving more money, and appearing to spend less at the pump, there could be other changes on the horizon. It could lead to some money being spent on new vehicles in the future. Strauss says that the liabilities side of the Fed’s balance sheet shows a large amount of excess reserves, meaning there are a lot of depository institution deposits now that are not being loaned out.

“On the demand side, the economy is growing at a very moderate pace,” he says. But it’s not fast enough to cause businesses to aggressively borrow.

But Strauss notes that when the financial sector decides to start loaning again, and the pendulum swings back that way, there will be a great deal of money to lend. “We’re definitely seeing that pendulum swing back toward more risk taking.”

That could lead to more new vehicle sales. Consumer confidence for buying new vehicles is rising, and he states that we are seeing an increased demand for new vehicles.

“Sales might be a bit held down if anything because of a shortage of product. The mistake I think the industry made, properly so, after (having too much inventory), they were doing a great job of managing inventory,” Strauss explains. “At the end of February, the inventories were very lean. They regret that now.”

It will be the end of the year before things pick up, especially from the Japanese players. And that’s key, as the Detroit 3 now make up less than half of the product sold.

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Overall, Strauss says the economy is on the mend, adding that the last time he addressed GAAS attendees in 2009, we were just on the point of coming out of the recession. However, the recovery is far removed from what happened in other marked points in the economy’s history, including the 1930s.

“What we’ve been experience though has been very disappointing in what we would think in a period of recovery,” he says, adding that given that it was the biggest drop in economy, we should see a big rise. But we haven’t.

Overall inflation has begun to increase this year. Adjusted for inflation, current oil prices are slightly above the levels that existed 30 years ago. “But keep in mind that incomes over this time did not remain the same,” he says. Incomes are 70 percent higher now.

All of this is disappointing because the forecast path of the current recovery is relatively muted compared with past deep recession recovery cycles. The average annualized growth rate in the 1982-82 was 6 percent, while 1974-75 was 5.3 percent and this time was 2.9 percent.

“The good news this time is at least we started to add jobs, but the job growth has been OK, not great to say the very least,” Strauss says.

We have a growing labor force, so each and every month we need to be creating 100,000 jobs just to employ new entrants. Because the outlook is to be only slightly above trend, the unemployment rate will be slow and at the end of next year, the unemployment rate still will be around 8 percent.

The economy will grow at solid rates, but disappointing ones, Strauss says. The employment market is expected to add 2 million jobs this year, above the 1.3 million added last year. But it still isn’t enough.

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